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Rule of 72
Rule of 72 is an investing rule of thumb that explains how long it takes to double your savings, approximately, for a given savings rate. To use the rule:
- Start with the number 72.
- Divide by the rate of return you expect to earn.
- This is your investment horizon, or number of years you need to double your savings.
For example, if the interest rate you earn is 7.2%, you would double your money in about 10 years:
- Start with the number 72.
- Divide by 7.2 to get a result of 10.
- You would need approximately 10 years, or 120 months, to double your savings.
Let's calculate an example of the rule:
Rule of 72 does not include adjustments for income taxes or inflation. Rule of 72 also assumes that you compound your interest yearly. If you compounded more frequently, you will reach your goal sooner.
Next Topic: The essential budget
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